Healthcare: 16 A-Grades, Seven Insurance Failures

The Split

Healthcare earned 16 A-grades out of 29 companies. That's a 55% success rate, the highest we've tracked across any sector. The 16.1% median FCF margin sits comfortably above most peer sectors. On paper, this looks like the strongest sector in the market.

Then you see the seven F-grades clustered at the bottom, and the story gets more specific. Five of those seven failures are health insurance companies. The other two are Moderna, burning cash post-pandemic, and Eli Lilly, which we'll address shortly.

The sector isn't uniform. It's two different businesses wearing the same label. Pharma, biotech, and med devices print cash. Insurance companies don't.

The Top Performers

Gilead leads at 29.1% FCF margin with an improving trend and an A grade. The company generates nearly $30 in free cash flow for every $100 in revenue, and the trajectory is pointing up. That combination is rare.

AbbVie sits at 27.6% margin but earned a B instead of an A because the trend is declining. The fundamentals are strong today, but the direction matters. When a company with that kind of margin is losing momentum, it raises questions about pipeline execution or patent cliffs ahead.

Bristol-Myers Squibb comes in third at 25.5% with an A grade despite a declining trend. The margin is high enough to absorb some erosion without threatening the base grade. That's the difference between starting at 25% versus starting at 15%.

Zoetis at 23.2% and IDEXX at 22.9% both earned A-grades with stable or improving trends. These are animal health companies, a subsector that doesn't get much attention but consistently generates real cash.

Johnson & Johnson sits at 19.1% with an improving trend. It's not the highest margin in the group, but the diversification across pharma, devices, and consumer health creates stability. The trend direction suggests the portfolio is working.

The Trend Problem

Twelve companies show improving trends. Fourteen show declining trends. Three are stable. That's a sector moving in both directions at once.

The improving group includes Gilead, IDEXX, Danaher, DexCom, and Intuitive Surgical. These are companies either gaining share, launching successful products, or executing operationally better than they were a year ago.

The declining group includes AbbVie, Bristol-Myers, Vertex, Amgen, Merck, and Pfizer. Some of these declines are explainable. Patent expirations, pipeline gaps, post-COVID normalization. But when this many large-cap pharma names are trending down simultaneously, it suggests the sector faces structural pricing pressure or R&D productivity issues.

Pfizer at 13.2% margin with a declining trend earned the only C grade in the sector. That's what happens when you're already near the threshold and momentum turns against you. The COVID windfall is gone, and what's left is a company that needs to prove it can grow without a once-in-a-generation product.

The Insurance Disaster

UnitedHealth Group: 3.4% margin, F grade, declining trend.

Cigna: 3.1% margin, F grade, improving trend.

CVS Health: 1.8% margin, F grade, improving trend.

Elevance Health: 1.5% margin, F grade, declining trend.

Humana: 0.1% margin, F grade, declining trend.

These are five of the largest health insurance companies in the country. Combined, they serve over 100 million Americans. None of them can convert revenue into free cash flow at a rate above 3.5%.

The problem isn't growth. UnitedHealth does $371 billion in annual revenue. The problem is that almost all of that revenue gets consumed by medical costs, administrative expenses, and capital requirements before any cash hits the balance sheet.

Cigna and CVS show improving trends, but improving from 1.8% to maybe 2.5% doesn't fix the fundamental issue. These businesses operate on razor-thin margins in an environment where medical cost inflation runs ahead of premium increases. That's not a business model. That's a treadmill.

When we last looked at healthcare in March, we called the insurance model broken. Three weeks later, nothing changed. The F-grades remain F-grades because the cash flow math doesn't work.

The Outliers

Moderna at -133.1% margin is the worst performer in the sector, but the trend is improving. The company burned massive amounts of cash as COVID vaccine revenue collapsed and R&D spending continued. The improving trend suggests the burn rate is slowing, but this is still a company with no clear path to profitability.

Eli Lilly at 8.2% margin with a declining trend earned an F grade despite being one of the hottest stocks in pharma. The GLP-1 drugs (Mounjaro, Zepbound) are driving huge revenue growth, but Lilly is plowing that cash back into manufacturing capacity and pipeline development. The result is weak free cash flow today with a bet on stronger cash flow tomorrow. The market loves the story. The FCF math says wait.

Align Technology at 7.6% with a declining trend earned a D grade. This is Invisalign. The company prints lower margins than most device makers and the trend is moving the wrong way. Competitive pressure in orthodontics is real.

What It Means

Healthcare is strong if you're in pharma, biotech, or devices. Sixteen A-grades prove that the fundamentals work when you're selling products with pricing power and manageable cost structures.

Healthcare is broken if you're in insurance. Five F-grades prove that the business model doesn't generate free cash flow at scale. These companies might be important. They might be necessary. But they're not good businesses by the metrics that matter.

The sector's 7.7x average debt-to-FCF ratio sits in reasonable territory, though that number is pulled down by the cash-rich pharma names. The insurance companies carry debt loads they can't service with organic cash generation.

If you're investing in healthcare, the question isn't about the sector. It's about which part of healthcare you're buying. The top half looks very different from the bottom half.